Table of contents

Table of contents :
Cover
……Page 1
Copyright……Page 3
About the Authors……Page 4
Preface……Page 5
Acknowledgments……Page 22
Brief Contents……Page 24
Contents……Page 25
The Attest Function……Page 34
Assurance and Nonassurance Services……Page 36
Financial Statement Audits……Page 37
What Creates the Demand for Audits?……Page 38
Major Auditing Developments of the 20th Century……Page 40
The Accounting Profession’s Credibility Crisis……Page 42
Types of Audits……Page 43
Types of Auditors……Page 44
The Public Accounting Profession……Page 45
American Institute of Certified Public Accountants……Page 46
Financial Accounting Standards Board……Page 48
Securities and Exchange Commission……Page 49
The International Federation of Accountants……Page 50
Other Types of Professional Services……Page 51
Organization of the Public Accounting Profession……Page 52
Responsibilities of the Professional Staff……Page 54
Professional Development for Public Accounting Firm Personnel……Page 55
Relationships with Clients……Page 56
Key Terms Introduced or Emphasized in Chapter 1……Page 57
Review Questions……Page 59
Objective Questions……Page 60
Problems……Page 65
Research and Discussion Case……Page 66
Supplementary References……Page 67
Auditing Standards……Page 68
AICPA Generally Accepted Auditing Standards……Page 70
PCAOB Auditing Standards……Page 74
Errors and Fraud……Page 75
Compliance with Laws and Regulations……Page 76
Nonpublic Company Audit Reports—Standard……Page 77
Public Company Audit Reports—Unmodified (Unqualified)……Page 81
Other Types of Auditors’ Reports……Page 82
The Attestation Standards……Page 83
Public Company Accounting Oversight Board……Page 84
Peer Review and Inspections……Page 86
International Accounting and Auditing Standards……Page 87
Chapter Summary……Page 89
Key Terms Introduced or Emphasized in Chapter 2……Page 90
Review Questions……Page 91
Questions Requiring Analysis……Page 92
Objective Questions……Page 93
Problems……Page 97
In-Class Team Case……Page 98
Appendix 2A: Comparison of International Standards on Auditing with AICPA Auditing Standards
……Page 99
What are Ethical Dilemmas?……Page 101
Making Ethical Decisions—A Professional Example……Page 102
The Need for Professional Ethics……Page 105
The AICPA Code of Professional Conduct—Overall Structure……Page 106
Preface of Code of Professional Conduct……Page 107
Rules and Conceptual Frameworks of Code of Professional Conduct……Page 108
Independence……Page 111
Individual vs. Firm Impaired Independence and the Nature of Covered Members……Page 112
Additional Independence Requirements for Covered Members……Page 114
Overall Firm Independence Requirements……Page 118
General Standards Rule……Page 123
Accounting Principles Rule……Page 124
Acts Discreditable Rule……Page 125
Contingent Fees Rule……Page 126
Confidential Client Information Rule……Page 127
Form of Organization and Name Rule……Page 129
Other Members……Page 130
Enforcement of Professional Ethics……Page 131
Ethics for Internal Auditors……Page 132
Chapter Summary……Page 133
Key Terms Introduced or Emphasized in Chapter 3……Page 134
Review Questions……Page 136
Questions Requiring Analysis……Page 137
Objective Questions……Page 138
Problems……Page 143
In-Class Team Cases……Page 144
Supplementary References……Page 145
Litigation Placed in Perspective……Page 146
Sources of CPA Liability……Page 147
CPAs’ Liability to Their Clients under Common Law……Page 148
The Elements of Duty and Breach of Duty……Page 149
The Element of Causation (Proximate Cause)……Page 150
Ultramares (Known User) Approach……Page 151
Rosenblum (Foreseeable User) Approach……Page 152
Liability to Third Parties under Statutory Law……Page 153
Securities Act of 1933……Page 154
Securities Exchange Act of 1934……Page 155
Comparison of the 1933 and 1934 Acts……Page 157
Auditors’ Criminal Liability under the Securities Acts……Page 158
SEC and Public Company Accounting Oversight Board Regulation……Page 159
CPAs’ Liability for Accounting and Review Services……Page 160
CPAs’ Posture in the Age of Litigation……Page 162
Key Terms Introduced or Emphasized in Chapter 4……Page 163
Review Questions……Page 165
Questions Requiring Analysis……Page 166
Objective Questions……Page 167
Problems……Page 171
In-Class Team Case……Page 174
Supplementary References……Page 175
Financial Statement Assertions……Page 176
Audit Risk at the Account Balance, Class of Transaction, or Disclosure Level……Page 178
Measuring Audit Risk……Page 179
Audit Evidence……Page 180
Types of Audit Procedures……Page 182
Types of Substantive Procedures……Page 187
Nature of Analytical Procedures……Page 189
Timing of Analytical Procedures……Page 193
Evidence Regarding Accounting Estimates……Page 194
Evidence Regarding Fair Values……Page 195
Evidence Regarding Related Party Transactions……Page 197
Confi dential Nature of Working Papers……Page 198
Working Papers and Auditors’ Liability……Page 199
Types of Working Papers……Page 200
Organization of Working Papers……Page 202
Guidelines for Preparation of Working Papers……Page 204
Review of Audit Working Papers……Page 206
Key Terms Introduced or Emphasized in Chapter 5……Page 207
Review Questions……Page 209
Questions Requiring Analysis……Page 211
Objective Questions……Page 212
Problems……Page 215
Research and Discussion Cases……Page 218
Supplementary References……Page 221
The Audit Process……Page 222
Obtaining Clients……Page 224
Submitting a Proposal……Page 226
Communication with Predecessor Auditors……Page 227
Planning the Audit……Page 228
Establishing an Understanding with the Client……Page 229
Develop an Overall Audit Strategy and Audit Plan……Page 230
Use of the Client’s Staff……Page 231
Obtaining an Understanding of the Client and Its Environment……Page 232
Risk Assessment Procedures……Page 233
Sources of Information……Page 235
Determining Materiality……Page 237
Assessing Risks of Material Misstatement……Page 240
Addressing the Risks of Material Misstatement Due to Fraud……Page 242
Designing Further Audit Procedures in Response to Assessed Risks……Page 246
The Audit Trail and Directional Testing……Page 247
Transaction Cycles (Classes of Transactions)……Page 248
The Systems (Internal Control) Portion of the Plan……Page 249
The Substantive Procedures Portion of the Plan……Page 250
General Objectives of Audit Plans for Assets……Page 252
Establishing Completeness……Page 254
Financial Statement Presentation and Disclosure……Page 255
Timing of Audit Work……Page 256
Key Terms Introduced or Emphasized in Chapter 6……Page 258
Review Questions……Page 260
Questions Requiring Analysis……Page 261
Objective Questions……Page 263
Ethics Case……Page 268
Appendix 6A: Selected Internet Addresses
……Page 269
Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting……Page 270
Risk Factors Relating to Misstatements Arising from Misappropriation of Assets……Page 272
Part I: Audit Planning……Page 273
Appendix 6C: Problems
……Page 280
The Meaning of Internal Control……Page 282
Means of Achieving Internal Control……Page 284
Effective Board of Directors……Page 285
Effective Organizational Structure……Page 286
Attracting, Developing, and Retaining Competent Employees……Page 287
Risk Assessment……Page 288
Transaction Control Activities……Page 289
Segregation of Duties……Page 291
The Accounting Information System……Page 292
Enterprise Risk Management……Page 293
Financial Statement Audits: The Role of Internal Control……Page 295
Obtain an Understanding of the Client and Its Environment, Including Internal Control……Page 296
Required Auditor Understanding of Internal Control Components……Page 297
Risk Assessment Procedures for Internal Control……Page 299
Documenting the Understanding of Internal Control……Page 300
Assess the Risks of Material Misstatement……Page 304
Assess Risks at the Financial Statement Level……Page 305
Tests of Controls……Page 306
Documentation……Page 308
Using the Work of Internal Auditors……Page 311
Consideration of Outsourced Computer Processing to Service Organizations……Page 312
Communication of Control-Related Matters……Page 314
Internal Control Reporting by Public Companies and Their Auditors……Page 315
Overall Approach for an Audit of Internal Control……Page 317
Internal Control in the Small Company……Page 318
Chapter Summary……Page 319
Key Terms Introduced or Emphasized in Chapter 7……Page 320
Review Questions……Page 322
Questions Requiring Analysis……Page 323
Objective Questions……Page 325
Problems……Page 329
In-Class Team Case……Page 331
Appendix 7A: Antifraud Programs and Control Measures
……Page 333
Chapter 8: Consideration of Internal Control in an Information Technology Environment
……Page 336
Characteristics of Various Types of IT-Based Systems……Page 337
Impact of IT on the Audit Trail……Page 340
Organizational Structure of the Information System Function……Page 341
Computer-Based Fraud……Page 344
Control Activities in an IT System……Page 345
General Control Activities……Page 346
Application Control Activities……Page 348
User Control Activities……Page 349
The Auditors’ Consideration of Internal Control in an IT Environment……Page 350
Obtaining an Understanding of IT-Based System Controls……Page 351
Assessing the Risks of Material Misstatement……Page 352
Designing Substantive Procedures with Computers……Page 357
Using Audit Software: An Illustration……Page 358
Chapter Summary……Page 359
Key Terms Introduced or Emphasized in Chapter 8……Page 360
Review Questions……Page 362
Objective Questions……Page 363
Problems……Page 366
In-Class Team Case……Page 367
Comparison of Statistical and Nonstatistical Sampling……Page 370
Selecting a Random Sample……Page 371
Stratification……Page 373
Types of Statistical Sampling Plans……Page 374
Sample Size……Page 375
Sampling Risk for Tests of Controls……Page 376
Define the Attributes and Deviation Conditions……Page 377
Specify the Risk of Assessing Control Risk Too Low and the Tolerable Deviation Rate……Page 378
Determine the Sample Size……Page 379
Test the Sample Items……Page 380
Evaluate the Sample Results……Page 381
Detailed Illustration of Attributes Sampling……Page 382
Other Statistical Attributes Sampling Approaches……Page 384
Nonstatistical Attributes Sampling……Page 385
Sampling Risk for Substantive Procedures……Page 386
Controlling Sampling Risk……Page 387
Evaluation of Sample Results……Page 388
Illustration of Mean-per-Unit Estimation……Page 389
Difference and Ratio Estimation……Page 392
Illustration of Difference and Ratio Estimation……Page 393
Illustration of Nonstatistical Sampling……Page 395
Key Terms Introduced or Emphasized in Chapter 9……Page 397
Review Questions……Page 399
Questions Requiring Analysis……Page 400
Objective Questions……Page 401
Problems……Page 406
In-Class Team Cases……Page 408
Determination of Sample Size……Page 410
Evaluation of Sample Results……Page 411
Illustration of PPS Sampling……Page 412
Considerations in Using PPS Sampling……Page 414
Appendix 9B: Audit Risk
……Page 415
Key Terms Introduced or Emphasized in Chapter 9 Appendixes……Page 416
Questions and Problems for Chapter 9 Appendixes……Page 417
Objective Questions……Page 418
Integrating Problem for Chapter 9 and the Appendixes……Page 420
The Auditors’ Objectives in the Audit of Cash……Page 422
Internal Control over Cash Transactions……Page 423
Internal Control over Cash Receipts……Page 424
Internal Control over Cash Disbursements……Page 426
Audit of Cash……Page 431
Financial Investments……Page 445
The Auditors’ Objectives in Auditing Financial Investments……Page 446
Internal Control over Financial Investments……Page 447
Audit of Financial Investments……Page 448
Substantive Procedures for Financial Investments……Page 449
Key Terms Introduced or Emphasized in Chapter 10……Page 454
Review Questions……Page 455
Questions Requiring Analysis……Page 456
Objective Questions……Page 458
Problems……Page 464
In-Class Team Cases……Page 468
Research and Discussion Case……Page 470
Ethics Case……Page 471
Sources and Nature of Notes Receivable……Page 472
Control Environment……Page 473
Revenue Cycle— Accounting System and Control Activities……Page 474
Internal Control over Notes Receivable……Page 478
Audit Documentation for Receivables and Revenue……Page 479
Audit of Receivables and Revenue……Page 480
Interim Audit Work on Receivables and Revenue……Page 504
Key Terms Introduced or Emphasized in Chapter 11……Page 505
Review Questions……Page 506
Questions Requiring Analysis……Page 507
Objective Questions……Page 509
Problems……Page 515
In-Class Team Case……Page 517
Ethics Cases……Page 519
Part II: Consideration of Internal Control……Page 520
Appendix 11A: Problems
……Page 533
Part III: Substantive Tests—Accounts Receivable and Revenue……Page 534
Appendix 11B: Problems
……Page 540
The Auditors’ Objectives in Auditing Inventories and Cost of Goods Sold……Page 541
Internal Control over Inventories and Cost of Goods Sold……Page 542
Risk Assessment……Page 543
Purchases and Production Cycles—Accounting Systems and Control Activities……Page 544
Audit of Inventories and Cost of Goods Sold……Page 548
Problems Associated with Inventory of First-Year Audit Clients……Page 566
Key Terms Introduced or Emphasized in Chapter 12……Page 567
Review Questions……Page 568
Questions Requiring Analysis……Page 569
Objective Questions……Page 570
Problems……Page 575
Ethics Case……Page 577
Research and Discussion Case……Page 578
The Auditors’ Objectives in Auditing Property, Plant, and Equipment……Page 579
Internal Control over Plant and Equipment……Page 580
Audit Documentation……Page 581
Audit of Property, Plant, and Equipment……Page 583
The Auditors’ Perspective toward Depreciation……Page 591
Audit Program—Depreciation Expense and Accumulated Depreciation……Page 592
Examination of Natural Resources……Page 593
Audit of Plant, Equipment, and Intangibles in Advance of the Balance Sheet Date……Page 594
Review Questions……Page 595
Questions Requiring Analysis……Page 596
Objective Questions……Page 598
Problems……Page 601
In-Class Team Case……Page 603
The Auditors’ Objectives in Auditing Accounts Payable……Page 605
Internal Control over Accounts Payable……Page 606
Audit of Accounts Payable……Page 608
Amounts Withheld from Employees’ Pay……Page 619
Accrued Liabilities……Page 620
Chapter Summary……Page 624
Review Questions……Page 625
Objective Questions……Page 627
Problems……Page 631
In-Class Team Case……Page 633
Part IV: Consideration of Internal Control……Page 634
Appendix 14A: Problems
……Page 637
The Auditors’ Objectives in Auditing Debt……Page 638
Internal Control over Debt……Page 639
Audit of Debt……Page 640
Sources and Nature of Owners’ Equity……Page 646
Internal Control over Owners’ Equity……Page 647
Audit Plan—Capital Stock……Page 649
Financial Statement Presentation of Stockholders’ Equity……Page 653
Chapter Summary……Page 654
Review Questions……Page 655
Questions Requiring Analysis……Page 657
Objective Questions……Page 658
Problems……Page 660
The Auditors’ Approach to Auditing Operations……Page 663
Miscellaneous Revenue……Page 664
Substantive Procedures for Selling, General, and Administrative Expenses……Page 665
Internal Control over Payroll……Page 668
Audit Plan for Payroll……Page 671
Completing the Audit……Page 672
Perform Procedures to Identify Loss Contingencies……Page 673
Perform the Review for Subsequent Events……Page 677
Communicate Misstatements to Management……Page 680
Evaluate Audit Findings……Page 681
Required Supplementary Information……Page 685
Supplementary Information in Relation to the Financial Statements as a Whole……Page 686
Additional Communications……Page 687
The Auditors’ Subsequent Discovery of Facts Existing at the Date of Their Report……Page 688
Chapter Summary……Page 689
Key Terms Introduced or Emphasized in Chapter 16……Page 690
Review Questions……Page 691
Questions Requiring Analysis……Page 692
Objective Questions……Page 693
Problems……Page 699
In-Class Team Case……Page 701
Research and Discussion Case……Page 702
Supplementary References……Page 703
Financial Statements……Page 704
The Auditors’ Standard Report—Nonpublic Clients……Page 705
The Auditors’ Standard Report—Public Clients……Page 707
Expression of an Opinion……Page 708
Reports with an Unmodified Opinion and an Emphasis-of- Matter Paragraph……Page 709
Substantial Doubt about a Company’s Going-Concern Status……Page 710
Generally Accepted Accounting Principles Not Consistently Applied……Page 711
Auditor Discretionary Circumstances That Result in an Emphasis-of-Matter Paragraph……Page 712
Group Financial Statements……Page 713
Materially Misstated Financial Statements (“Departures from GAAP”)……Page 716
Inability to Obtain Sufficient Appropriate Audit Evidence (Scope Limitation)……Page 718
Two or More Report Modifications……Page 720
Reporting on Comparative Financial Statements……Page 721
Reports to the SEC……Page 722
Chapter Summary……Page 723
Key Terms Introduced or Emphasized in Chapter 17……Page 724
Review Questions……Page 725
Objective Questions……Page 726
Problems……Page 733
In-Class Team Cases……Page 736
Research and Discussion Case……Page 738
Overview……Page 740
Management’s Evaluation Process and Assessment……Page 741
The Auditors’ Responsibility for Reporting on Internal Control in PCAOB Audits……Page 744
Plan the Engagement……Page 745
Use a Top-Down Approach to Identify Controls to Test……Page 746
Test and Evaluate Operating Effectiveness of Internal Control over Financial Reporting……Page 751
Form an Opinion on the Effectiveness of Internal Control over Financial Reporting……Page 755
Audit Report Modifications……Page 758
Integrated Audits for Nonpublic Companies……Page 761
Key Terms Introduced or Emphasized in Chapter 18……Page 762
Review Questions……Page 763
Questions Requiring Analysis……Page 764
Objective Questions……Page 765
Problems……Page 768
In-Class Team Cases……Page 769
Reporting on Compliance with Aspects of ContractualAgreements or Regulatory Requirements in Connection with Audited Financial Statements……Page 771
Letters for Underwriters……Page 772
Audits of Financial Statements Prepared inAccordance with Special-Purpose Financial Reporting Frameworks……Page 773
Single Financial Statements and Specific Elements, Accounts, or Items of Financial Statements……Page 776
SSARS Reviews of Nonpublic Companies (Nonissuers)……Page 779
PCAOB and Auditing Standards Board Reviews of Interim Information……Page 784
Compilation and Preparation of Historical Financial Statements……Page 785
Compilation of Financial Statements……Page 786
Preparation of Financial Statements……Page 787
Chapter Summary……Page 789
Key Terms Introduced or Emphasized in Chapter 19……Page 790
Questions Requiring Analysis……Page 791
Objective Questions……Page 792
In-Class Team Case……Page 796
Research and Discussion Case……Page 797
Supplementary References……Page 798
Assurance Services……Page 799
The Demand for Assurance Services……Page 800
Attestation Standards……Page 801
The Criteria……Page 802
The Character of the Engagement……Page 804
Assurance on Internal Control over Financial Reporting……Page 806
Assurance on Prospective Financial Statements……Page 807
Trust Services……Page 808
Service Organization Control (SOC) Reports……Page 810
PrimePlus/ElderCare Services……Page 811
Future Assurance Services……Page 812
Chapter Summary……Page 813
Key Terms Introduced or Emphasized in Chapter 20……Page 814
Review Questions……Page 815
Objective Questions……Page 816
In-Class Team Case……Page 820
Research and Discussion Case……Page 821
Evolution of Internal Auditing……Page 822
Professional Standards of Internal Auditing……Page 824
General Approach to Operational Audits……Page 835
Attesting to Compliance with Laws and Regulations……Page 839
Compliance Reporting by Broker-Dealers under PCAOB Requirements……Page 841
Compliance Auditing of Government Entitiesand Organizations Receiving Federal Financial Assistance……Page 842
Chapter Summary……Page 850
Review Questions……Page 851
Questions Requiring Analysis……Page 852
Objective Questions……Page 854
Problems……Page 856
In-Class Team Case……Page 857
A……Page 858
C……Page 861
E……Page 864
F……Page 865
I……Page 867
M……Page 870
N……Page 871
P……Page 872
R……Page 874
S……Page 875
T……Page 877
Z……Page 878